Originally posted in bdnews24.com on 11 June 2026
Economist Mustafizur Rahman warns soaring spending must be matched by stronger revenues, reform
From banking reform to LDC graduation, he outlines the economic priorities he believes can shape a smoother transition
The BNP government is preparing to present one of Bangladesh’s most ambitious budgets in recent years, promising greater investment in education, healthcare, social protection and infrastructure at a time when the economy is still struggling to regain momentum.
For economist Mustafizur Rahman, however, the question is not simply how much the government plans to spend. The greater challenge is whether Bangladesh can finance those ambitions without sliding into a cycle of mounting debt, weak institutions and disappointing returns.
Many middle-income countries, he notes, have found themselves trapped in precisely that predicament — unable to sustain growth while burdened by rising debt obligations.
As Bangladesh embarks on a new political and economic chapter following the upheaval of 2024, Mustafizur believes policymakers must ensure that development spending does not become a pathway to a debt trap.
The distinguished fellow of the Centre for Policy Dialogue (CPD) discussed the state of the economy, budget expectations and emerging risks during an appearance on Inside Out, bdnews24.com’s flagship discussion programme, streamed on the news outlet’s YouTube channel and Facebook page.
His central message was clear: ambition must be matched by discipline.
As the government moves to implement development initiatives spanning education, health, social protection and infrastructure, revenue collection targets will need to be roughly 35-40 percent higher than the actual revenue expected to be collected in the ongoing fiscal year.
“If we fail to collect that revenue, the government will have to borrow heavily, either domestically or from foreign sources. The risk of falling into a debt trap is real, and I believe the government must give serious consideration to this danger.”
Explaining the issue further, Mustafizur pointed to the experience of many developing economies.
“We see that many countries have fallen into the middle-income trap. They have graduated to middle-income status but have been unable to move beyond it. In many cases, the middle-income trap becomes synonymous with a debt trap.
“We must ensure that we do not fall into that trap. Keeping that risk in mind, we need to manage development activities carefully, strengthen revenue collection, ensure cost-effective spending, secure good value for money, improve institutional capacity, establish good governance and complete projects efficiently and economically.”
The BNP government, elected after the political transition triggered by the July Uprising, is set to present its first national budget on Jun 11. Finance Minister Amir Khosru Mahmud Chowdhury is expected to unveil a spending plan worth approximately Tk 9.38 trillion for fiscal year 2026-27.
The government has already signalled how its political priorities may be reflected in economic policy.
The proposed Annual Development Programme (ADP) for the new fiscal year has been increased by 50 percent compared with the revised allocation for the current year.
In other words, despite economic stagnation, the government intends to accelerate development spending.
Yet economists continue to debate where the money will come from and whether implementation capacity can be strengthened sufficiently to deliver results.
Longstanding concerns over project delays, inefficiency and misuse of public funds remain unresolved, and criticism can be heard even within government circles.
Bridging Promises and Public Expectations
The upcoming budget will be a major test of whether the new government can align its political commitments with the aspirations of the people.
“We face a range of accumulated challenges, among which investment stagnation, high inflation and job creation are among the most important.”
According to Mustafizur, inflation has steadily eroded living standards over the past several years. Global instability has only intensified the pressure.
The conflict in the Middle East has raised concerns over energy security, while fuel and electricity prices have increased at a time when households are already struggling under the weight of inflation.
For the BNP government, he argues, the greatest challenge is establishing a meaningful connection between the promises that brought it to power and the expectations of the public.
‘Moral Hazard’ of Legalising Black Money
Successive governments have included provisions in their budgets allowing holders of undeclared income to legalise their wealth.
While the policy is often justified as a way to stimulate land and property markets and bring hidden money into the formal economy, it has repeatedly drawn criticism.
Early indications suggest the BNP government may not be departing from that practice.
Mustafizur said there are economic, political and ethical reasons why governments struggle to break the cycle.
“Economically, it is not particularly beneficial because relatively few people actually take advantage of these opportunities.”
More importantly, he said, such measures create a “moral hazard” for honest taxpayers.
“When people know they may later be able to legalise money at a more favourable rate, the incentive to pay taxes properly and on time is weakened.”
From both political and policy perspectives, he described the approach as problematic.
However, he suggested that if such an opportunity were ever offered for a final time, it should include a substantial penalty and be accompanied by a clear commitment that no future amnesties would be granted.
Ultimately, he believes the lasting solution lies in policy reform and technology.
“If we can update official land valuation records and related systems, the opportunity for abuse will diminish. In my view, if we make better use of technology and implement the policy reforms that are needed, this problem can be significantly reduced.”
Restoring Confidence in Investment
Mustafizur believes the government’s highest budget priority should be restoring confidence in private-sector investment.
“In Bangladesh today, the more educated a person is, the higher the likelihood that they are unemployed.”
Addressing that challenge requires revitalising private investment and reducing the cost of doing business.
He advocates reforms to tariff structures, improvements in market management, effective implementation of existing policies, the introduction of a genuine single-window system, implementation of the logistics policy and shorter turnaround times at ports.
At the same time, he emphasises the importance of policy support and restructuring the tax system to make it more investment-friendly.
“If we can achieve this, it will have a positive impact on two major challenges: job creation and income generation, and reducing inflation. Therefore, I believe the central focus of the budget should be how to stimulate investment.”
His second priority is providing relief to low-income and vulnerable groups through social protection initiatives.
To improve effectiveness, he recommends using digital registries to remove errors and prevent ineligible individuals from receiving benefits.
Third on his list is ensuring quality education — particularly technical and vocational education — and improving healthcare by making community clinics more effective.
Low Revenue at the Root of the Problem
Despite record revenue shortfalls, the government is aiming to collect nearly 40 percent more revenue than it is expected to collect this fiscal year.
Mustafizur argues that the problem is not the size of the budget but the country’s capacity to mobilise resources.
Both direct and indirect tax collection must be strengthened.
“In many cases, citizens pay indirect taxes but the government does not receive the money. VAT is collected at numerous points but does not always reach the state.”
Instead of placing additional pressure on existing taxpayers, he recommends broadening the tax base and using technology to improve compliance.
“I do not think the budget is excessively large. A country like Bangladesh needs significant spending on education, health, social protection and infrastructure. Nor can all of this be financed domestically, which is why deficit financing exists.
“We borrow either domestically or externally. The issue is not borrowing itself. The issue is whether we can use those resources effectively enough to generate the income needed to repay the debt.”
Nevertheless, he cautioned against excessive reliance on borrowing.
Debt-servicing costs on domestic and foreign loans could reach nearly Tk 1.4 trillion in the new budget, making interest payments the largest item in the government’s revenue expenditure.
Borrowing is normal for a developing economy, he said, but policymakers must ensure that debt levels do not become a source of risk.
Syed Mahmud Onindo, Now, Edited
Political Interference and Bad Loans
Describing the financial sector as the economy’s “bloodline”, Mustafizur argued that investor confidence cannot be restored without meaningful banking-sector reforms.
“We expect the budget to contain a clear vision for financial-sector reform. The government has already announced a Tk 600 billion refinancing window, and we may see its reflection in the budget.”
Yet he stressed that the success of reform would depend on implementation rather than announcements.
“The central bank’s ability and capacity to operate independently is extremely important.
“The Bangladesh Bank must be able to manage the banking sector in accordance with economic priorities and without political interference. These issues do not necessarily appear in the budget itself, but when implementation begins, the central bank must be able to support macroeconomic management while preserving its independence.”
Mustafizur highlighted the dramatic revision in Bangladesh’s bad-loan figures.
In July 2024, officially reported non-performing loans stood at Tk 1.22 trillion. After the publication of more accurate figures, the amount was found to be close to Tk 6 trillion, equivalent to roughly 35-36 percent of total loans.
Reducing bad loans, he said, remains “a major challenge”.
“In such a situation, the sustainability of the banking sector itself becomes questionable. At least we now have a clearer understanding of the true scale of the problem.
“What is particularly alarming is that non-performing loans have increased by nearly Tk 310 billion in just the past few months.”
Preventing the creation of new bad loans must be the first priority.
“We have seen these loans increase because of political interference, institutional weaknesses and corruption. We must ensure that this does not happen again.
“The second task is clearing the existing backlog. As reforms and mergers are discussed, we must also provide relief to the millions of depositors affected by these problems. We need to attack the issue from both directions.”
Making LDC Graduation Smooth
Bangladesh is scheduled to graduate from the United Nations’ Least Developed Country (LDC) category on Nov 24, 2026. However, questions remain about whether the country is fully prepared.
Although the UN Committee for Development Policy has recommended extending the preparation period, a final decision is expected at the General Assembly in September.
Mustafizur believes additional time would be beneficial, but preparation must continue regardless.
“We must complete our preparations quickly so that we can move from competitiveness based on market preferences to competitiveness based on efficiency and productivity.
“That means building a skilled workforce, reducing the cost of doing business for exporters, implementing a single-window system, enforcing the logistics policy, introducing paperless trade systems, improving trade facilitation and reducing port turnaround times. These measures will help us enormously.”
He argues that budgetary incentives alone will not be enough. Broader improvements in macroeconomic management and institutional capacity are equally important.
“If we want LDC graduation to be sustainable, if we want to maintain momentum and ensure a smooth transition, these are the steps we must take.”
Zero Tolerance for Corruption
Despite the economic challenges, the government remains committed to implementing a large budget.
Mustafizur believes success will depend heavily on governance and a genuine policy of zero tolerance towards corruption.
If those conditions can be met, he argues, the benefits will extend far beyond public finances.
“It will improve revenue collection. It will help stimulate investment. It will strengthen institutional capacity and improve the delivery of public services to citizens. The positive impact will be felt across every sector of the economy.”
